Business Management Discussion Questions

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Political risk was once fairly
easy to understand; more
often than not, it involved
dictators who suddenly
seized foreign assets.
But increasingly it comes
from other actors: people
making videos on their cell
phones, city officials issuing
ordinances, terrorists
detonating truck bombs,
and many more.
First, the end of the Cold
War superpower rivalry
has made the geopolitical
landscape more crowded
and uncertain. Second,
longer, leaner supply chains
have left companies more
vulnerable to disruptions
in faraway places. Finally,
new technologies mean
that social activism isn’t
just for social activists
anymore. Bystanders can
post videos that go viral and
cause significant political
damage to companies.
Organizations that excel
at risk management have
four core competencies:
understanding, analyzing,
mitigating, and responding
to political risks. A series
of questions can help
executives identify gaps
in each area and increase
their ability to get ahead
of and minimize risk.
Until recently, political risk was relatively easy to
understand. More often than not, it involved dictators
who suddenly seized foreign assets for their own domestic agendas, like Venezuela’s Hugo Chávez. Today
expropriating leaders are far less common than they
used to be. And although national governments are
still the main arbiters of the business environment, a
great deal of the political risk within and across countries now comes from other players: individuals wielding cell phones, local officials issuing city ordinances,
terrorists detonating truck bombs, UN officials administering sanctions, and many more. Events in far-flung
places affect businesses around the world at dizzying
speed. Anti-Chinese protests in Vietnam create clothing stock-outs in America. Civil war in Syria fuels a
refugee crisis and terrorist attacks in Europe, leaving
the tourism industry shaken. A North Korean dictator
launches a cyberattack on a Hollywood movie studio.
We live in a new world of political risk.
For companies, 21st-century political risk is essentially the probability that a political action will significantly affect their business—whether positively
or negatively. This definition is more radical than it
sounds. We chose the phrase “political action,” not
“government action,” to highlight the growing role of
risk generators outside the usual places like capitals,
army barracks, and party headquarters. These days,
political activities that affect business are happening
almost everywhere—inside homes, on the streets,
and in the cloud; in chat rooms, dorm rooms, and
boardrooms; in neighborhood bars and summit sidebars. Companies that want a competitive edge need
to manage the potential impact of this widening array
of global political actors.
Considered in isolation, many 21st-century political risks seem like low-probability events. If
you’re American, the chance that you’ll be killed by
a foreign-­born terrorist is about one in 45,000—far
more remote than your odds of dying from a heat
wave or by choking on food.
Unlike Blackfish, most social-­
In 2010, Gabriela Cowperthwaite read a news article that changed
activism documentaries don’t beher life. It described how an orca whale had killed a trainer
come viral sensations. Cumulative
during a show at SeaWorld in Orlando. Cowperthwaite, a Los
risk is a different matter, however,
Angeles filmmaker who liked taking her twins to see orcas at
and is easy to underestimate.
the San Diego SeaWorld, spent the next two years making an
While the probability that a single
investigative documentary, Blackfish, which depicted how the
political risk will affect a compatheme parks’ treatment of orcas harmed both the animals and
ny’s business in a particular city
their human trainers. The film cost just $76,000 to produce. Yet
tomorrow may be low, the probait quickly went viral, capturing the attention of celebrities and
bility that over time some political
animal rights groups. Public pressure on SeaWorld mounted.
risk somewhere in the world will
Corporations cut sponsorship ties, regulators opened investigasignificantly affect its business is
tions into the parks’ safety practices, and lawmakers proposed
surprisingly high. Add up a string
a ban on breeding orcas in captivity. Eighteen months after the
of rare events, and you’ll find that
release of Blackfish, SeaWorld’s stock price had plunged 60%,
the overall incidence is not so rare
and CEO Jim Atchison announced that he was resigning. By 2018,
after all.
SeaWorld’s stock still had not recovered—all because one woman
The good news is that while
had read a story about orcas and made a low-budget film.
political risk has grown complex,
effectively managing it remains fairly straightforward. Organizations can get ahead by getting the
basics right. Building on existing best practices and
drawing on our own leadership experiences and research, we have identified four core competencies of
organizations that excel at risk management—and a
series of questions that can help executives identify
gaps in their organizations’ ability to operate in an era
of increasing global insecurity.
Three megatrends are transforming the landscape for
political risk: dramatic changes in politics since the
end of the Cold War, supply chain innovations, and
the tech revolution.
Politics. Companies today operate in the most
complicated international political environment in
modern history. During the Cold War, superpower rivalry between the United States and the Soviet Union
set relatively clear dividing lines between adversaries
and allies. Trade politics and security politics were
sharply delineated, too. The world was largely split between Western capitalist markets and the command
economies of the Soviet bloc. Arms control treaties
involved the Soviets, but global trade negotiations did
not. Today’s landscape is much more crowded and
uncertain—filled with rising states, declining states,
failed states, rogue states, and nonstate actors like
terrorist groups and cybercriminals. And security isn’t
just about security anymore; international economic
issues are often tightly connected to security policy
and politics.
When Condi was secretary of state, she watched in
dismay as Dubai Ports World, an award-winning port
management company owned by the government of
the United Arab Emirates, was forced to transfer its
ownership of U.S.-based shipping terminal operations
to an American entity following a public backlash.
Although the UAE was a staunch U.S. ally and a thorough U.S. government review had found no security
concerns with the deal, Americans heard the words
“Arabs” and “ports,” and in the aftermath of 9/11, that
was enough to make Dubai Ports World’s operations
in the U.S. untenable—even in one of the staunchest
pro-market economies in the world.
Supply chains. The growing efficiency of supply
chains is unlocking enormous value for companies.
Even very small businesses can now take advantage
of lower offshore wages, low shipping costs, and better inventory management. But there is a dark side
to the supply chain revolution: Longer, leaner global
supply chains leave companies more vulnerable to
disruptions in faraway places.
As companies extend their overseas supplier relationships in search of improved margins, customization, and speed, the chances rise that a political action
will disrupt the distribution of goods and services to
In the table below, we summarize the major types of political risk that
companies face in the 21st century. Our definition of political risk goes
beyond the probability that an action by government officials could affect
a company in significant ways; to us it includes the impact of political
actions by a wide range of people and organizations. We’ve chosen to
exclude climate change and purely economic risks, however. Climate
change is a major global challenge, but we view it as more of a risk
multiplier than a separate risk category. It can trigger political actions,
from social activism and new regulations to civil wars and interstate
conflicts—all risks that our list covers. And we left out economic risks
because most businesses already consider them routinely, examining
indicators such as inflation, labor markets, growth rates, and per capita
income across markets.
Interstate wars, great power
shifts, multilateral economic
sanctions, and interventions
Internal conflict
Social unrest, ethnic violence,
migration, nationalism,
separatism, federalism, civil
wars, coups, and revolutions
Laws, regulations, policies
Changes in foreign ownership
rules, taxation, environmental
regulations, and national laws
Breaches of contract
Government reneging
on contracts, including
expropriations and politically
motivated credit defaults
Discriminatory taxation and
systemic bribery
Extraterritorial reach
Unilateral sanctions and criminal
investigations and prosecutions
Natural resource
Politically motivated changes to
the supplies of energy and rare
earth minerals
Social activism
Events or opinions that go viral,
facilitating collective action
Politically motivated threats
or violence against persons
and property
Theft or destruction of intellectual
property; espionage; extortion;
and massive disruption
of companies, industries,
governments, and societies
analysts began worrying about the ramifications for the airline in the Chinese market,
where commenters on social media shared
the view that Dao was discriminated against
because he was Asian.
Effective risk management requires four core competencies: understanding risks,
analyzing risks, mitigating risks, and responding to crises. In each competency,
three questions will help identify gaps and areas for improvement.
What is my
political risk
How can we get
good information
about the political
risks we face?
How can we reduce
exposure to the
political risks we
have identified?
Are we
capitalizing on
near misses?
Is there a shared
understanding of
our risk appetite?
How can we ensure
rigorous analysis?
Do we have a good
system and team
in place for timely
warning and action?
Are we reacting
effectively to
How can we reduce
blind spots?
How can we
integrate political
risk analysis into
business decisions?
How can we limit
the damage when
something bad
Are we developing
for continuous
their customers. When China moved an offshore oil
rig into Vietnam’s exclusive economic zone in 2014,
anti-Chinese protests erupted in Vietnam. Suppliers
of Li & Fung, one of the world’s largest wholesale providers of clothing and toys, were forced to close their
Vietnamese factories for a week, slowing delivery of
goods to the United States. What had begun as a conflict over disputed territorial waters in Southeast Asia
quickly emptied store shelves in U.S. cities.
Technology. Social media, cell phones, and the
internet are also transforming the 21st-century political environment. Forty-eight percent of the world
is online. By 2020 more people in the world are expected to have mobile phones than to have running
water or electricity. Technology is dramatically lowering the cost of collective action, making it easier for like-minded people to find one another and
join a common cause, even across vast distances.
What’s more, social activism is not just for social
activists anymore. In a hyperconnected world, bystanders can post cell phone videos that go viral. On
April 9, 2017, after United Airlines oversold a flight to
Louisville, Kentucky, the airline decided to remove
four passengers. One of them, David Dao, refused to
deplane. Passengers video-recorded Dao as he was
violently dragged from his seat and posted the footage on Twitter and Facebook. Two days later, United’s
stock had lost $255 million in shareholder value, and
How can companies best manage political
risk in this environment? Some hire consultants to provide analysis and advice when
they need it. Others rely largely on in-house
units. Many employ a hybrid approach. While
no one model fits all, we have developed a
framework that is broad enough for most
companies to apply but suggests specific actions. The framework focuses on four competencies: understanding risks, analyzing risks,
mitigating risks that cannot be eliminated,
and putting in place a response capability
that enables effective crisis management and
continuous learning.
At each step in the framework, there
are three guiding questions that everyone
in any organization can ask to address the
most important issues.
Step 1: Understand
What is my organization’s political
risk appetite?
Companies, like individuals, approach risk differently. Factors that influence their appetite for it include the time horizon of major investments, the
availability of alternative investments, the ease of
exiting investments, and visibility to consumers.
Companies in extractive industries like oil and gas,
for example, undertake long-term investments in
distant countries, many of which are governed by autocratic regimes and are prone to social unrest. In addition, these firms’ key assets cannot be moved easily.
For all those reasons, oil and gas companies must be
willing to tolerate substantial political uncertainty. In
contrast, consumer-facing industries, such as hotel
chains and theme parks, are particularly susceptible
to reputational damage and typically have a lower
risk appetite as a result.
Is there a shared understanding of our risk appetite?
The best companies ensure that political risk is a
concern for everyone, from the boardroom to the
sales floor. Of course, not everyone in an organization will have a similar take on it: The way lawyers
and accountants approach risk differs from the way
marketers and product developers do, and those
differences need to be sorted through and resolved.
At Disney the shared understanding is that “nothing
hurts the mouse.” Disney essentially sets the political
risk appetite close to zero.
In 2006 the Lego Group created a strategic risk
management capability, which helped align views on
risk across the company. The effort was led by Hans
Læssøe, an engineer and a 25-year company veteran
who called himself Lego’s “professional paranoid.”
He set up systematic processes for training all new
managers about risk; engaging every important business leader, including the board members, in setting
the risk appetite; identifying risks; and integrating
risk assessment and mitigation into business planning. Læssøe’s team even developed a “net earnings
at risk” metric that management and the board used
to estimate the company’s risk exposure annually.
How can we reduce blind spots?
Reducing blind spots requires imagination. As one
major investor told us, “The biggest mistake is believing the future will look like the present. It almost
never does.” His firm trains all its associates to ask a
simple question, over and over: What if we are wrong?
Scenario planning, war-gaming exercises, and other
methods can also help firms identify hidden risks.
While the tools vary, the goal is the same: fostering
creative thinking and guarding against groupthink.
Step 2: Analyze
How can we get good information about the
political risks we face?
It may sound obvious, but you have to look for good
information to find it. Companies sometimes neglect
to do this. When General Electric’s legendary CEO
Jack Welch tried to acquire Honeywell International,
in 2001, the merger sailed through the U.S. Justice
Department review, and Welch assumed that EU approval would soon follow. It didn’t. European regulators didn’t have the same philosophy about antitrust issues that their American counterparts did; the
Europeans focused on the potential impact on competitors, not on consumers. And although European
regulators had never rejected a major American
merger before, they had come close, nearly scuttling
the merger of Boeing and McDonnell Douglas just
four years earlier. But Welch and Honeywell’s CEO,
Michael Bonsignore, were so eager to close the deal
that they reportedly never consulted their European
antitrust attorneys in Brussels. When it became clear
the merger was dead, Welch declared, “You are never
too old to get surprised.”
vulnerable. The more those lists converge, the higher
a company’s political risk. The backlash against
SeaWorld was particularly damaging because trained
orcas were so important to the company’s brand.
Precisely quantifying vulnerability is impossible.
But that doesn’t mean managers can’t reduce uncertainty. Various tools—from red teams (which assume
opposing roles or points of view) to Monte Carlo computer simulations (which project the range and likelihood of outcomes)—can help. The goal is to develop
ways of understanding key drivers and possibilities so
that surprises aren’t so surprising.
FedEx is a model of effective risk management. As
the company once said, “[We] may not be able to foresee what will cause the next European truck drivers’
strike, but [we] know that ground delays will happen
at some point, and when it happens, the backup plans
are ready to go.” Marriott International has a five-tier
color-coded security alert system for all its hotels and
continuously assesses whether to move each hotel up
or down. The Marriott risk team doesn’t know exactly
when or where terrorists may strike next. Its system
is designed to increase preparedness and safety—by
notifying hotel managers about changing conditions
that might pose a threat, designating specific tasks for
every threat level, and auditing compliance to ensure
that everyone knows what to do.
How can we integrate political risk analysis
into business decisions?
In 2016 a global survey by McKinsey found that only a
quarter of executives integrate risk analysis into a formal process. The most popular method for addressing geostrategic risk is to simply do ad hoc analyses
as events arise. Lego has a better approach, called
“boat spotting”—keeping an eye out for potential risks
and opportunities so that you don’t “miss the boat.”
The company has used many risk assessment tools,
including analyses of Google Trends search data and
How can we ensure rigorous analysis?
Richard Feynman, one of the world’s great physicists,
once said that analysis is how we try not to fool ourselves. Nobody can predict the future, but good risk
analysis challenges assumptions and mental models
about how it might unfold so that organizations are
better prepared.
One useful way to begin is by understanding
which assets are most valuable and which are most
scenario planning. But it also understands that
more important than the approach is the intention:
Simply getting managers to use rigorous political risk
analysis—of any variety—to defend investments can
significantly improve decision making.
Step 3: Mitigate
How can we reduce exposure to the political
risks we have identified?
Three strategies are almost always useful: dispersing
critical assets (colloquially, don’t put all your eggs in
one basket), creating surge capacity and slack in the
supply chain, and working with others in the industry
to share political risk assessments and mitigation strategies. The last approach, which is perhaps the most often overlooked, has been undertaken in the hospitality
industry. In 2005 suicide bombers simultaneously hit
Hyatt, Radisson, and Days Inn properties in Amman,
Jordan. In the aftermath of the bombings, Marriott’s
vice president for global safety and security, Alan Orlob,
formed a hotel security working group with competitors to share information and best practices—receiving
sponsorship from the State Department’s Overseas
Security Advisory Council.
Do we have a good system and team in place
for timely warning and action?
Companies that manage political risk well do not
sit back waiting for government advisories or quarterly industry reports. To develop better situational
awareness, they set up effective warning systems
that constantly scan a wide range of sources for information. They also establish protocols so that responses to specific conditions are triggered automatically. These protocols make clear what steps should
be taken and by whom. The idea is to reduce decision
making on the fly.
Companies on the front lines of managing global
political risk often create in-house threat-assessment
units staffed with former intelligence and law enforcement professionals who track political developments
in real time. Royal Caribbean International’s team is
led by a 25-year veteran of the FBI. Orlob worked in
the U.S. Army Special Forces for 24 years. Chevron’s
eight-person team of global risk experts has a combined 92 years of experience in government security
services. These and other best-practice firms know
that dedicating a team to spotting risks and developing
a warning system can make all the difference.
How can we limit the damage when something
bad happens?
Managers can take steps to minimize potential damage long before a crisis unfolds. Relationships with
external stakeholders are critical during a crisis, for
instance—but building them takes time. Former
secretary of state George Shultz often likens good
diplomacy to gardening—you have to cultivate relationships with counterparts before you ask them to
do something hard on your behalf. The same is true
in business.
Step 4: Respond
Are we capitalizing on near misses?
All organizations want to learn from failures. Not
enough try to learn from events that could have ended
poorly but didn’t because luck saved the day. Leaders
must recognize and correct for the human tendency
to ascribe close calls to a system’s resiliency when
it’s just as likely the near miss occurred because of a
system’s vulnerability. The Challenger shuttle tragedy is a classic example: Dangerous erosion of special
“O-ring” seals had occurred in shuttle flights before
the disaster, but the seals had never completely failed,
which led NASA managers to mistakenly believe that
failure was not likely.
Are we reacting effectively to crises?
Good crisis management can be distilled into five steps:
assess the situation, activate a response team, lead with
values, tell your story (and be honest!), and do not fan
the flames. Crises often involve multiple audiences—
consumers, investors, journalists, activists, elected
officials, federal regulators, and law enforcement officials, to name a few. Each audience can affect the
others, generating new risks and making the situation
worse. Managing the dynamics among the interested
parties is essential.
Soon after Condi began serving as President
George W. Bush’s national security adviser, a Chinese
fighter jet collided with an American surveillance
plane in international airspace. The Chinese pilot
was killed, and the U.S. plane had to make an emergency landing in China. Its crew members were detained while the two governments negotiated the
terms of their release. For President Bush, the goals
were clear: The crew had to be released; America
would not apologize for legally conducting surveillance in international airspace; and the relationship
with China needed to be maintained. Neither country
wanted to escalate the situation, but the negotiations
Periodically we see major events affect virtually everyone in the
global economy. Often these “exogenous shocks” cannot be
anticipated. But an organization that has built up its expertise in
political risk management can still blunt their impact. Five such
shocks have affected the political world—and by extension the
business world—since the end of the Cold War.
The most significant was the terrorist attacks of September 11,
2001, which revealed that the United States faced threats from
weak and ungoverned areas of the world, not just powerful
countries. Ever since the Treaty of Westphalia in 1648 marked the
beginning of the modern state system, great powers had been most
focused on the dangers posed by other great powers. Not anymore.
The 2008 global financial crisis caused a second shock, leading
to greater government intervention in the form of austerity
measures and new regulations. It also heightened people’s
awareness of how the global economy was affecting their personal
well-being—and helped give rise to populist backlashes. When
you lose your house because of the global financial system,
international economics becomes personal.
Third, the Arab Spring and the subsequent unrest across
the Middle East increased pressure on both governments and
businesses in the region and cast doubt on whether the current
state system would endure there. Artificially set at the end of the
Ottoman Empire by the French, the British, and the Italians, the
national borders of Saudi Arabia, Yemen, Turkey, Iraq, Syria, and
the Gulf States cut across regional concentrations of Shia, Sunni,
and Kurds. The Syrian civil war has added complexity, displacing
nearly 6 million people and putting an immediate strain on
neighboring countries where they’ve sought shelter. The impact of
this refugee crisis on Europe may be long-lasting and fuel a strong
sense that the EU no longer protects its borders and citizens from
the dangers of the Middle East.
The fourth shock we call “great powers behaving badly.” The
governments of both China and Russia have become increasingly
assertive, reigniting long-running territorial conflicts—over the
Ukraine in Russia’s case and the East and South China seas in China’s.
Finally, nativism, populism, protectionism, and isolationism are
making a comeback. Globalization lifted millions of people out
of poverty and grew the wealth of millions more. Still, it created
losers—people who lacked the skills to compete in the modern
economy and those for whom a call center in India, servicing
American customers, became a symbol of a threat to them, not an
opportunity for a worker in New Delhi. The Brexit vote in 2016 and
the election of Donald Trump in the United States—the first time
that the country elevated someone with absolutely no government
experience to the presidency—stemmed in part from these
reactions to globalization. It is telling that in the U.S. election, not
one of the candidates—Donald Trump or Bernie Sanders or even the
former secretary of state Hillary Clinton—defended free trade.
These five major shocks are straining the international order,
affecting power dynamics across countries and the politics within
them—with reverberating effects across markets.
were complicated by multiple audiences. The U.S.
government could not just say, “China, you listen
only to this part. Congress, you listen only to that
part.” Condi was on the crisis team that met twice a
day to carefully manage the response. That effort included crafting a strategy for communications that
would show that the governments were working on
the problem but w

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